In the United States, Defined Contribution (DC) plans are the most popular employer-sponsored retirement plans, comprising total household assets of $6.9 trillion as of March 31, 2021. Of these, target-date funds — an investment scheme where the portfolio shifts to be more and more conservative as the target date approaches — are a significant part. Target-funds might analyze risk tolerance at an individual level, but the asset allocation is disproportionately based on a single variable: Age. The older the participant, the mellower their investment choices.

The simplicity of this system has long been attractive for the participant and plan sponsors. However, it’s precisely this simplicity that also makes it ineffective at worst and sub-optimal at best. As Jacqueline Matthews, CEO of Investment POD, says, “In the real world, everybody is different. Two 55-year-old investors may have completely different income patterns, spending/saving habits, inheritance potential, health issues, aging parents to take care of, marital status, longevity potential and risk tolerance.”

Personalizing their retirement plan to meet their needs, desires, and ambitions offers multi-pronged benefits to participants and plan sponsors. Some of them are explored below.

Personalization helps participants avoid under-saving

Unlike age-based savings models, personalized retirement plans accurately measure the money each individual would need in retirement. This visibility ensures that participants save as much as they would need. And helps plan sponsors to design a portfolio that better addresses those needs.

Data-driven personalization better meets individual needs

One of the significant concerns about the industry’s shift from Defined Benefit — fixed payment for the participants till the end of life — to Defined Contribution retirement model is: Can DC fulfill the participant’s retirement goals?

For instance, a prolonged retired life would result in a gradual reduction in social security benefits. One way to prevent this is to ensure that the retirement plan matches the income replacement ratio (IRR) — a widely used measure of retirement income adequacy based on plan participant’s household income, family status, educational attainment, outside assets, and outside assets retirement age.

Data-driven approaches enable personalization at scale, considering all these factors and evolve dynamically as the socio-economic situation changes.

Personalization improves adaptability

By March 2020, when the repercussions of the pandemic started hitting financial markets, target-date funds with a 30-year target date suffered negative returns of 45% the size of funds.  

While plans are linear, real life is not. The rigidity of automated investments allows little to no room for adaptation and often leaves the plan participants hopeless as they see their portfolios plunge. Personalized retirement solutions are customizable, adapting to evolving market conditions, offering long-term stability.

Personalization empowers investors

Four in five Americans lack retirement planning knowledge. A personalized retirement planning strategy places the participant at the center of all the interactions across several parties and utilizes their evolving data to make ongoing decisions. As a result, the participants are encouraged to be fully vested in where their money goes and how it grows.

Building a personalized retirement planning strategy

With the growth in data and advanced analytics technologies to process and understand that data, personalization is distinctly easier. Here is a simple three-step approach to building a personalized retirement planning strategy for your participants.

#1 Plan the team

Personalized solutions rely heavily upon:

  • Data (often raw and unstructured)
  • Analytics systems that process data into insights
  • Ongoing optimization and management

As a plan sponsor, the first step to offering personalized solutions to your participants is to collaborate with retirement planning technological partners and recordkeepers.

#2 Build a data-driven investment profile

In collaboration with your tech partners, build data-driven investment profiles for your participants. Apart from age, you might also consider gender, salary, current accounts, contribution rate, details of benefit plan, short- and long-term milestones etc.

#3 Leave room for ongoing optimizations

The very essence of personalization is to have systems that evolve along with your participants’ needs and life situations. Enable inputs changes from participants, regulatory boards, sponsors, and the market to keep the portfolio strong.

Retirement choices are personal, so should retirement saving strategies be. Today, technology solutions can enable personalization at scale with little or no effort from the plan sponsors themselves. For instance, the team at Congruent reverse-engineered the legacy system of a Fortune 100 retirement plan provider, which now enables them to leverage their data better.

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